Purchase orders: the complete guide

Most disputes between buyers and suppliers have the same root: nobody wrote down exactly what was agreed before the work started. A purchase order is the cheapest fix for that problem ever invented.

What a purchase order is

A purchase order, shortened to PO, is a document a buyer sends to a supplier to confirm an order. It lists what is being bought, in what quantity, at what price, to be delivered where and by when. Once the supplier accepts it, the PO usually forms a binding agreement on those terms.

Inside the company, the PO does a second job. It is the anchor for the three-way match, where accounts payable compares the order, the receipt and the invoice before releasing payment. Without a PO, there is nothing reliable to compare the invoice against.

Purchase order, requisition, quote and invoice: who does what

Four documents get mixed up constantly. They come in a fixed order, and each answers a different question.

What goes on a purchase order

You do not need a long document. You need the right fields, filled in properly.

• PO number. Unique, sequential and never reused. Everything else refers back to it.
• Date of issue.
• Buyer details. Legal entity name, billing address, and the person to contact.
• Supplier details. Legal name, address and contact.
• Line items. Description, part or service code, quantity, unit of measure and unit price for each line.
• Totals. Subtotal, taxes, shipping and grand total, with the currency stated.
• Delivery details. Ship-to address, requested delivery date and delivery method.
• Payment terms. For example net 30, meaning payment is due 30 days after the invoice date.
• Reference to a contract. If a master agreement exists, name it so its prices and terms apply.
• Approval. Who authorized the order and when.

Our free purchase order template has all of these fields laid out.

The four main types of purchase order

Standard purchase order

A one-time order for specific items at a known price and quantity. This is the default. If you buy 20 laptops for a new team, you raise a standard PO.

Blanket purchase order

An agreement to buy up to a set value or quantity from one supplier over a period, with deliveries released as needed. It suits repeat purchases such as cleaning supplies or fasteners, where raising 50 separate orders would be wasteful. See blanket purchase order workflow and the blanket PO template.

Planned purchase order

A commitment to buy a defined set of items on a schedule, with details such as delivery dates still to be confirmed. Manufacturers use these when demand is predictable.

Contract purchase order

An order raised under the terms of a longer contract. The PO carries the quantities and dates, while the contract sets prices, service levels and legal terms.

How a PO moves through the business

1. A requester raises a purchase requisition and gets approval.
2. A buyer picks the supplier, checks prices and creates the PO.
3. The PO is approved if it crosses the approval limit.
4. The PO is sent to the supplier, who confirms it.
5. The goods arrive and a receipt is recorded against the PO.
6. The invoice arrives and is matched to the PO and the receipt.
7. The PO is closed once everything is delivered and paid.

The whole flow is described in the procure to pay process.

Why purchase orders matter

• Control. No PO, no payment is a simple rule that stops a lot of rogue spending.
• Budget visibility. Open POs show money that is committed but not yet invoiced, so your budget picture is truthful.
• Legal clarity. If a delivery goes wrong, a PO shows what you ordered.
• Faster payment. Matching a clean invoice to a clean PO takes minutes. Matching one to nothing takes days.
• Audit evidence. Auditors ask for the order trail. A PO is the first document in it.

Mistakes that cause trouble

1. Issuing the PO after the work has started. This is called a retrospective or after-the-fact PO. It means the order was never controlled. Track how many you raise. A rising number points to a process that is too slow.
2. Vague descriptions. "Consulting services" tells nobody what was ordered. Describe the deliverable, the rate and the cap.
3. Missing unit of measure. Is the price per box or per item? A wrong assumption here can multiply a bill by twelve.
4. Not closing old POs. Open POs with no activity keep money reserved in your budget for no reason.
5. Ignoring partial deliveries. If half the goods arrive, the receipt and invoice should reflect half. Decide how your system handles that before it happens.
6. Letting anyone create suppliers and POs. Separate those duties.

When you do not need a PO

Not every purchase deserves one. Many companies exempt small, low risk buys, such as items under a set amount paid by corporate card, utilities, taxes and payroll. The rule should be written down, so that exemptions are a decision and not a habit. If you have no policy yet, the procurement policy guide covers where to draw the line.

Paper, spreadsheet or software

At ten POs a month, a spreadsheet and a PDF template work. At a few hundred a month, you want numbering, approval routing, supplier records and matching built into a system. Purchase order software, covered on our purchase order software category page, handles those parts and links to receiving and payment.

Purchase orders in different situations

• Services. Describe the deliverable, the rate and a cap on total spend. "Consulting, up to 40 hours at 150 dollars an hour, cap 6,000 dollars" is a usable line. "Consulting" is not.
• Software. State the product, the number of licenses, the term and whether the price is per user per month or per year. Reference the vendor contract so its renewal terms apply.
• International orders. State the currency, who pays duties and taxes and which delivery terms apply. Mismatched assumptions about who pays shipping cause many disputes.
• Recurring deliveries. Use a blanket PO with a ceiling and a clear release process, so each delivery is recorded against the same order.

Terms to know

• Line item. One product or service on the order, with its own quantity and price.
• Unit of measure. The unit the price applies to, such as each, box or hour.
• Ship-to and bill-to. Where goods go and where the invoice goes. They are often different.
• Open PO. An order not yet fully delivered or closed.
• Change order or amendment. A formal change to an issued PO.
• Retrospective PO. An order raised after the work began. Track them.

Frequently asked questions

Where to read next

• Purchase requisition guideThe step before the PO
• Invoice approval and GRNMatching the PO to the invoice
• PO approval workflowRouting without delay
• PO templateFree download